Efficient nash equilibrium under adverse selection
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This paper revisits the problem of adverse selection in the insurance market of Rothschild and Stiglitz (QJE, 1976). We propose a simple extension of the game-theoretic structure in Hellwig (EER, 1987) under which Nash-type strategic interaction between the informed customers and the uninformed firms results always in a particular separating equilibrium. The equilibrium allocation is unique and Pareto-efficient in the interim sense subject to incentive-compatibility and individual rationality. In fact, it is the unique neutral optimum in the sense of Myerson (ECMA, 1983).
Diasakos , T & Koufopoulos , K 2013 ' Efficient nash equilibrium under adverse selection ' School of Economics & Finance Discussion Paper 1313 , no. 1313 , University of St Andrews .
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(c) 2013 the authors
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